| Typically, calculating ROI for a nonprofit is a strictly dollars and cents discussion. It focuses on how much it costs to raise money and run programs and compares that data to the organization’s offerings to assess effectiveness. Sure, selecting the right Key Performance Indicators (KPIs) to track and calculating returns on fundraising efforts are important. However, they do not always tell the whole story. | SROI – Social Return on Investment |
A traditional analysis looks at inputs like fundraising expenses and operational costs and outputs like the number of people served and geographic area covered. The goal is basically to understand how the organization is using its funds to do something beneficial. This approach works if the output is something with a clear monetary value like scholarships granted or number of meals served. However, that approach seems to fall short when attempting to measure the “unquantifiable” impact a nonprofit has on its community – things like reducing isolation, giving community members a voice, offering mentorship, preventing violence, providing acceptance for marginalized groups, or reducing homelessness. Therefore, a true analysis of a nonprofit’s impact needs to include an evaluation of their Social Return on Investment (SROI) also.
What is Social Return on Investment?
Investopediadescribes SROI as “a method of accounting for the social, economic, and environmental value created by a company” and explains that it is a helpful way for nonprofit foundations and organizations to prove their value.
Calculating SROI
Obviously, the benefits realized by the people/animals/environment that a nonprofit serves are not strictly financial in nature but assigning a fair value to them helps to determine the organization’s impact. How do you even begin to quantify that return? In an article aboutproving nonprofit impact, Heather Stombaugh outlines the proper methodology by explaining,
How much does the problem you address cost society in financial terms? Using research results from the peer-reviewed literature, determine the intangible and tangible costs avoided or benefits gained from your nonprofit’s work. For example, researchers have determined the average cost of a single case of child abuse or the benefits obtained from one person leaving homelessness. You can use those figures to show costs avoided if your nonprofit prevents child abuse or helps one person regain permanent housing. Then you place those values against the value of your nonprofit’s investment and outcomes.
Then, she puts the approach into the following formula:
SROI = (tangible + intangible value to the community)/total resource investment
When doing an SROI calculation, it is important to pay attention to two areas where mistakes commonly occur because the last thing you want to do is present inaccurate SROI figures to your key stakeholders.
The first area where errors typically occur is in the underlying assumptions that go into the intangible value to the community. Make sure that you run your numbers by other trusted professionals to help uncover any faulty assumptions. Another nonprofit leader or the board of a partner organization that is not as close to the work being done will likely have the impartiality to spot any errors or issues with your numbers (or at least any places where donors may have questions).
The second area where organizations can make mistakes is total resource investment. Take note that this is your TOTAL investment. Ensure that you are including ALL the associated costs that go into providing programming, not simply the direct costs or the biggest costs. Include the cost of fundraising, staff time, shipping, venue rental, etc. Where possible, match up your expenses with the expenses identified on the “cost to the community” of the problem you are addressing. (For example, if part of the cost to the community is physician billing time and you utilize volunteers to do screening, note the comparison line to line. It adds to your credibility.)
SROI Ratio
If the SROI formula above does not seem to fit your organization’s work, a better approach may be to focus on your SROI Ratio instead. The SRIO Ratio formula is:
SROI Ratio = Cost to the community of whatever it is your organization is addressing per incident – Your cost to address that problem per incident
Here is a real-world example of how a nonprofit would calculate SROI Ratio (using placeholder numbers):
Cost of unprovided medical screening for each person with a disability = $100,000.
The nonprofit’s cost of providing those screenings = $8,000.
Therefore, the organization’s SROI is 92%. Using this information, they can then tell their largest donors, “For every dollar you invest in our health screening programs we save the community $92! And that doesn't even begin to address the increased productivity of people who now are healthier and can contribute more to the community!”
An organization’s SROI Ratio also better accounts for partial outcomes than the basic SROI calculation mentioned previously. It is important to be mindful of the value of partially solving a problem because those benefits also have significant value! Sure, you may not eliminate the cost to the community, but you may reduce it significantly, so you will want to allow for that in your calculations.
Why does SROI Matter?
A Social Return on Investment calculation is going to have at least some amount of estimation because there is no way of knowing definitively what the cost would be to society if your particular organization was not doing exactly what it does, when it is doing it, for the exact people it serves. The intangible benefits offered by your organization operating in its community are difficult to approximate, but getting to a reasonably accurate number is important for:
- Generating donations
- Securing grant funding
- Encouraging and motivating staff
- Recruiting volunteers
- Approaching partnership opportunities
- Measuring employee, leadership, and board performance
- Making strategic decisions
If you need help maintaining strong nonprofit leadership, please contact us! Our team of experienced nonprofit leaders has extensive experience across Executive Director, CEO, and Board President roles that they can leverage. We can come alongside your organization to help prove its value while it continues to make an impact in the community. Find out more about our nonprofit consulting and board advisory services today!
